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Continental European pension funds are benefiting more from hedge fundsâ higher returns during periods of market volatility, according to a report from the UKâs F&C Asset Management.

UK pension funds do not have as high an allocation to hedge funds and may miss out on the start of a new curve of hedge fund outperformance, according to the manager.

A recent survey of 574 European pension schemes by investment consultants Mercer found that 7% of UK pension funds invest in hedge funds, against 13% in Europe.

Paul Niven, head of asset allocation at F&C, said: "Given the scale of current pension fund deficit in the UK, it is puzzling why UK schemes are still hesitant to make full use of hedge funds in their asset allocation. The historic risk of losing money is lower with hedge funds than with equity."

F&C said hedge funds performed best during periods of high volatility. In the nine months following the WorldCom crisis, hedge funds were up 2.8% while equities fell by 21.1%.

Francois Barthelemy, a partner at F&C’s funds of hedge funds business, said: "Before May, volatility had been at its lowest level for the past five years and that was clearly unsustainable. We do not suggest that this time round volatility will be as high as in 2000 but we think it will remain higher than it was over the last three years. Clearly this will benefit performance of hedge funds."